Viagra and the Wealth of Nations
Paul Krugman
August 23, 1998
What popped into your mind when you first read
the headlines about Viagra? Well, I thought about
that, too. But as a typical, fun-loving economist I also
found myself wondering how the Commerce Department
would account for the wonder drug in its estimates of
the gross domestic product — and from there wandered
into a reverie about the meaning of economic progress.
Government statisticians will, of course, have no difficulty
slotting Viagra into their estimates of “nominal”
G.D.P., the sum total of all the money spent in the
economy. Viagra’s contribution will simply be the total
amount that people spend on the pills, or, equivalently,
the profits earned and wages paid in the drug’s
manufacture and distribution. What’s more, we can be
pretty sure that Viagra’s numbers, while music to the
stockholders’ ears, will make very little difference to the
national totals. The new drug’s spectacular sales are
small change in an $8 trillion economy. And besides,
most of the spending on this new product will come at
the expense of spending on other things — say, romantic
vacations and candlelight dinners.
But nominal G.D.P. doesn’t tell us much. Most of
the time, the economic number we care about is “real,”
or inflation-adjusted, G.D.P., which is supposed to measure
the purchasing power as opposed to the dollar income
of the economy. Basically, nominal G.D.P. is converted
into real G.D.P. by dividing it by a price index —
a “deflator” — that is supposed to measure the average
cost of goods and services sold in the economy.
So far, so good. But what happens with the introduction
of Viagra, or Propecia, or whatever the next big
thing may be? Statisticians can’t compare the prices of
these drugs with what they were last year because they
weren’t around last year. So inevitably, estimates of the
deflator take account only of the goods that have been
around for at least a little while.
So what? Well, this year some men can buy something
they wanted pretty badly — or baldly, in the case
of Propecia — and they can get it at a reasonable price.
Last year they couldn’t buy what the pills provide at any
price, and probably would have gladly spent far more at
clinics or in therapy to get lesser results. So surely, in
some sense, the nation’s purchasing power has increased
because of the availability of those pills.
Yet the numbers you see on real G.D.P. don’t reflect
that increase — and they never will. Eventually Viagra
will be in the index, and as its price falls in the face
of competition, the deflator will fall and measured real
income will rise. But at no point will the statistics ever
capture the big payoff, the one that happened when
Viagra became available for $10 a, um, pop.
How could the statisticians get this right? It would
have to involve a subjective evaluation: each person
would have to be asked, and would have to answer truthfully,
the question “How much money would you have
spent last year (with your ever-growing bald spot and
that other problem) to be as satisfied as you are now?”
Averaging over the population, we would come up with
a true measure of the change in the cost of living, and
we would deflate G.D.P. by that.
In fact, where they can, the statisticians do try to
do something more or less along these lines, adjusting
the price of automobiles and many other products by
imputations for improved quality. But nearly everyone
admits that the imputations fall well short of capturing
the real improvement in living standards. Officially,
the median family in 1996 had only slightly higher real
income than it did in 1973; in reality, that median family
would be extremely upset if forced to go back to
a 1973 standard of living (no VCR, no microwave, no
A.T.M.’s).
So what’s the moral? Should we smugly assume that
the official statistics understate economic progress, that
the New Economy is speeding us to a new age of economic
bliss? Not so fast. For one thing, it is by no
means clear that our age of technological marvels is any
more marvelous than the age our parents, grandparents
or great-grandparents lived in.
Viagra is only the latest in a long line of medical miracles
— antibiotics, smallpox vaccine, anesthesia — just
as the Internet is only the latest in a line that goes back
to the fax machine, the telephone and the telegraph.
While the statistics do understate today’s true rate of
economic progress, they always have.
But there is a deeper point. The value of Viagra is
not a dollar-and-cents issue. Rather, it is a psychological
question — what we are really asking is how much better
off the drug makes people feel. But isn’t that true of
economic progress in general? And once you put it that
way, you have to wonder whether we are really making
that much progress after all.
Consider: According to the official statistics, the median
family in 1947 had almost exactly the same purchasing
power as the 20th-percentile family — just a
little ways above the poverty line — of 1996. And the
statistics surely understate the true increase in purchasing
power. Does that mean that most people in 1947
were poor? Well, they didn’t feel poor. Conversely, the
60th percentile in 1996 officially had about the same
real income as the 95th percentile in 1947, and again
this surely understates the real progress.
Does this mean that most Americans are now upper
middle class? They don’t feel that way.
In other words, as soon as you try to think seriously
about how to measure Viagra’s effect on the nation’s
wealth, you realize what a dubious enterprise such comparisons
are. I have nothing against calculating real
G.D.P. as accurately as possible; we need that number
for all kinds of purposes. But the rather vulgar case
of Viagra reminds us that, in the end, economics is not
about wealth — it’s about the pursuit of happiness.
c 1998 The New York Times Company
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